Hand in Hand
Just as the privatization boom peaked in Latin America in the late 1990s - by World Bank figures the region led the world in selling off state-run assets, averaging US$26.55 billion a year from 1990 through 2003 - the subsequent collapse was nearly as staggering, both for investors and for the ordinary people around the region in need of clean water, working telephones and paved roads.

The impact is still being felt in countries like Bolivia and Argentina, where governments have faltered under the strain of explaining mismanagement and outright theft, although the biggest sin is most likely poor management of expectations: Private money was touted as a risk-free, pain-free answer, and it turned out to be far from that.

Yet we're likely on the edge of a second boom. Driven by a huge increase in exports and subsequent pressure on roads, ports and rail, things are picking up. Plus, the world's largest economies are back in the game at last. But this time the rules will be quite different. An estimated $60 billion a year flows into privatization efforts now, down from $100 billion in the second half of the 1990s, according to the Public-Private Infrastructure Advisory Facility, a technical assistance body made up of government development agencies in Europe, Asia and the United States.

Private-public partnerships (PPP) will be a big part of that. Stung by protest and outright anger, as well as incompetence among some concessionaires, participants in the next big round of privatizations - surely to be in the hundreds of billions of U.S. dollars - are playing it safe. They are looking for governments to share the risk.

Brazil has yet to launch its first public-private partnership venture. Strapped for cash and facing multiple infrastructure bottlenecks, President Luiz Inácio Lula da Silva hopes to introduce an ambitious series of projects before his first term ends at the end of next year. Success depends on a fourth ``p,'' which is politics.

The federal government has announced five priority projects - two railways and three highways - worth more than $1.23 billion all told. The marquee endeavors, and the first two expected to go on the block, are the North-South Railway between Tocantins and Maranhao states and the BR 116 highway linking northern Minas Gerais to Bahia.

There isn't much, if any, outright opposition to the PPP idea - at least not to any of the now-planned projects. If there's consensus about anything in Brazilian politics, the PPPs might even be it. Lula's program is based on a study by the consultancy KPMG delivered to his predecessor and political adversary Fernando Henrique Cardoso. The governors of Minas Gerais and São Paulo, Cardoso allies both, lead a group of eight states implementing local public-private schemes. Minas Gerais may beat the feds to the punch with a highway project that should be sent to bid during the second half of this year, according to Maurício Endo, a partner and director at KPMG, which is advising state officials.

What threatens Lula's plan isn't partisan opposition but a set of two unique political roadblocks - one regulatory, one historical. Legal restrictions on public spending during the run up to the October 2006 presidential balloting is forcing officials to race against the clock, like a soccer team scampering for a much-needed goal in the final minutes of a match. Adding to the pressure, the Lula administration must overcome a history among Brazilian politicians of disregard for contracts; the administration's response has been to engineer a novel scheme of formal guarantees designed to calm the fears of antsy investors.

After the PPP bill passed in December, bureaucrats struggled with the enabling regulations. They had to blend Brazil's legal system, which is based on the French tradition of rigid rules for public-private relations, with the PPP concept, which is rooted in more flexible English law and allows more room for deal making. ``In England, the government negotiates with the winner of the contract, but here there's the issue of equal treatment,'' says Cláudio Maurício Freddo, president of the PPP Institute and partner in the law firm Freddo, Janduci, Chebabi, Theodoro Advogados. ``A losing bidder can say that he'd have made a different offer if he'd known how things would end up.'' One solution: a two-step bidding process by which pre-qualified companies can comment on terms and conditions, in effect ``pre-negotiating'' the deal is finalized.

The biggest sticking point has been something called the guarantee fund, a public nest egg to be set aside to compensate any private partners that might eventually be stiffed by the government. Chile briefly and modestly established similar guarantees when it launched its PPP program, but for the most part the Brazilian scheme is new. ``There's nothing like it around the world,'' says Rubens Teixeira Alves, associate consultant with the law firm Albino Advogados Associados.

The fund emerged in response to investor distrust of Brazilian public officials. On innumerous occasions over the years they have refused to honor contractual agreements or tried to backtrack on signed deals. Last year, Parana Governor Roberto Requião famously but unsuccessfully tried to revoke highway concessions in his state. ``In the reasonably recent past, the noncompliance of contracts was always part of the scene,'' says Antonio José Alves Junior, head of the economic agency of the Planning Ministry, whose department will oversee the public-private program. José de Freitas Mascarenhas, vice-president of the National Industrial Confederation (CNI) and president of the CNI Infrastructure Committee, is more blunt: ``The public sector in Brazil always pays late.''

If an angel of an idea, the fund has proved devilish to implement. To jumpstart work on the projected $2.45 billion backlog, the federal government pledged $1.63 billion worth of stock, minority shares and ``excess'' holdings that would not compromise the government's controlling interest in state-owned companies. Infighting over the fund's structure, and especially over who would manage it, continued for months. On June 2, an inter-ministerial task force came up with a hybrid scheme that divides the responsibility between the state-owned banks Banco do Brasil and the Banco Nacional de Desenvolvimento Econômico e Social (BNDES). The fund itself will consist of the shares and cash; federally owned real estate can be included but will likely be left aside, at least initially.

As soon as the fund issue is resolved, Lula will want to get a project or two into the pipeline before April of next year. Brazilian law places tight restrictions on public outlays during the last six months prior to an election, and the first round of the presidential poll is set for October 2006. Many lawyers and administration officials argue that the law does not cover PPPs because public money only enters the equation after a project is completed; at the earliest, the first of the projects would be completed in 2007. But jumping the gun could mean lawsuits.

``The line about PPPs seems to make them a solution to all of our problems,'' says Mascarenhas. ``The government seems to be coming back down to earth, but until recently there was going to be a PPP for everything. That's impossible. All of the other mechanisms are easier to implement - even concessions.''

For investors, additional questions remain. For example, about how quickly the BNDES can follow through on President Guido Mantega's plan to begin to offer project financing - a line heretofore not handled by the institution. ``There will be no PPPs if there is no project financing,'' says Irineu Berardi Meireles, director of Odebrecht Construction. Though they may quibble with details, business leaders like the move to adopt PPPs. ``The structure is basically good and healthy,'' Meireles says. ``They're on the right track.''

In a country like Mexico, where public resources alone are not enough to meet the demand for infrastructure, public-private partnerships could be the answer. So says Luis Alberto Ibarra, head of the investment office of Mexico's Finance Ministry, the Secretaría de Hacienda y Crédito Público (SHCP).

Tax collection rates are lower in Mexico compared to other Latin American countries and members of the Organization for Economic Cooperation and Development. Mexico, for example, collects just over 10% of its gross domestic product (GDP), while Chile collects more than 35%. ``To the degree that public financing is tight, it will be necessary to find alternative forms of financing,'' says Ibarra.

Currently, public spending via public-private partnerships is 4% of GDP, of which 2% comes from public coffers, according to Finance Ministry data. In 1990, when there still were no PPPs in place, public spending on infrastructure fluctuated between 3% and 3.5% of GDP.

Public-private partnerships began in Mexico in the 1990s. It got started with highway concessions, but the results were mixed. According to Ibarra, at the time estimates of income from the highways were too optimistic, and it was thought that the investments would be paid back sooner. Then the 1994 banking crisis ensued and many of the contractors had trouble paying the debts they had assumed. Concessions had to be abandoned, and the would-be concessionaires lost the money they had invested while the government absorbed their debts on the projects.

Today, highway concessions are operating more smoothly. By the mid 1990s, the country had come up with a new plan. The bidding on the first project - a highway in the city of Matehuala in the central Mexican state of San Luis Potosi, now completed - was won by a builder called Omega and represented a total investment of $36 million, financing of which the private sector supplied a little more than half.

Water treatment plant projects got underway in the 1990s, and by 1995 reforms were put in place regarding the budget and government debt that allowed public-private deals on long-term productive infrastructure projects that focused on the energy sector. Under this arrangement, state-run companies like Mexican oil giant Petróleos de México (Pemex) and electricity supplier Comisión Federal de Electricidad (CFE), began their own projects. The so-called Pidiregas-type projects worked in two ways: direct investment and conditional investment.

In the first case, private companies finance the building of the actual assets and, once operational, turn them over to the state. Under the second scheme, used most by the CFE, private energy providers have plants built by private companies. The private energy supplier then signs a long-term contract to supply the CFE for distribution, says Ibarra. ``The money provided by Pemex as well as by CFE is debt taken on by both companies, and the most important requirement that they have to meet is that the income generated by these assets exceeds the value of the assets,'' he says.

Through a Pidiregas project, Mexican builder Ingenieros Civiles Asociados (ICA) won a bid to build the El Cajón hydroelectric dam, a $750 million project in the northeastern state of Nayarit. ``It has gone very well for us, the project is under way. We're almost 60% done and we're on time and on budget,'' says José Luis Guerrero, ICA vice president of finance. The project has created 10,000 jobs and is estimated upon completion in 2006 to generate 1,228 megawatts a year.

Currently, ICA has $2 billion in signed contracts and is bidding on $10 billion more. ``We want to take part in highways, hospitals, another hydroelectric dam and irrigation projects,'' says Guerrero. ``The government has realized that if the projects are well planned, if there is a contractual framework and adequate legal controls, if the time-frames are reasonable and there are studies on traffic and income, there will be significant offers from bidders.''

Coming soon is the Fénix project, which would build petrochemical complexes to reduce Mexico's deficit in products like polypropylene, which it now imports heavily. The plan, which is based on a 20-year contract, would require investments of $1.80 billion, of which Pemex is to provide less than half. Despite the decision by major companies such as Indelpro (part of Grupo Alfa), Idesa and Nova Chemical to take part, the project has not yet gotten off the ground.